Employers have a right to demand loyalty from their employees while they are employed. This means that, during the term of employment, employers may legally prohibit an employee from competing or taking steps that would be detrimental to an employer’s ability to conduct business. However, contractual provisions applying those restrictions to a former employee—known as “covenants not to compete” or “non-competes”—are generally not allowed in California. California’s prohibition against non-competes has been around for many years and has made it difficult for California medical groups to prevent a former employee from competing directly, including joining a competing medical group. Effective January 1, 2024, the boundaries around what an employer may legally demand in this area have become even more limited, and the consequences for violators are significantly more severe.
First, a brief overview of the law before this year’s changes: California has long prohibited the enforcement of covenants not to compete with very narrow exceptions. (See Bus. & Prof. Code § 16600.) This contrasts with many other states where it is lawful for an employer to impose covenants not to compete so long as the duration and geographic area of the restriction are “reasonable.”
The one exception to California’s broad prohibition against the enforcement of non-competes is when a former employee was also an owner of the affiliated business. This area is legally complex, but generally, if the former employee was also an owner, then it’s possible for agreements to prohibit that employee from competing post-employment; however, such provisions must be carefully crafted, otherwise, a medical group employer can easily find itself unable to enforce such a provision.
With this background, in the last legislative session, two new bills were enacted into law: Assembly Bill No. 1076 and Senate Bill No. 699, both dealing with this subject. (Codified in Bus. & Prof. Code §§ 16600.1, 16600.5, respectively.) Next, we will briefly review these two new laws.
AB 1076 reaffirms that covenants not to compete, unless they fall within a statutory exception, are void and unenforceable—but it goes beyond that. For the first time, it is now unlawful for employers to place unenforceable covenants not to compete in employment contracts, and, if the employer has any employment contracts that contain such covenants for employees who were employed after January 1, 2022, it must notify all such employees (and former employees) on or before February 14, 2024, that the provision is void. Failure to provide notice will constitute an act of “unfair competition” under California’s Unfair Competition Law (“UCL”) and subject the employer to the possibility of litigation and damages under that section. This makes it important that all employers have their employment contracts reviewed to assure that they do not contain any unlawful non-competes, and if they do, ensure such notifications are sent.
SB 699 adds additional teeth to the enforcement of non-compete violations, providing that any violation gives an employee the right to bring a private legal action, seeking an injunction, damages, and if such action is successful, reimbursement of attorneys’ fees by the employer. This means that, a former, or even current, employee can sue an employer for the mere presence of a non-compete provision, and not only obtain an injunction, but recover provable damages plus the cost of the employee’s attorneys’ fees in bringing such legal action.
SB 699 additionally clarifies that California laws against covenants not to compete prevail over contradictory laws that might otherwise apply in other states. Thus, if the employment is to be performed within California, California’s prohibitions against covenants not to compete will control (even, for example, if the employee lives outside of California).
If you would like advice on your employment contracts, please reach out to one of the listed attorneys.
